This Could Be Big for AMD Stock

Advanced Micro Devices, Inc.’s (NASDAQ:AMD) fourth-quarter 2015 results will be reported after the closing bell. Here’s what owners of AMD stock need to know ahead of AMD’s Q4 results release.Before I get down to discussing the earnings forecast, I must mention three important considerations that are substantial to AMD’s business this year.The semi-conductor industry has seen a massive shift, where two factors alone have defined the success or failure of any company—speed and power—both of which have increased significantly over the years. Stiff competition has driven out many players in the industry that failed to offer competitively high speeds and longer battery lives.AMD has, however, survived the heavy threats from heavyweights like Intel and Nvidia by staying ahead of the game. The company not only delivered on the two aforementioned factors—speed and power—but it also managed to undercut competition by offering cheaper chips. This ability to survive on razor-thin margins compared to bigger competitors is the first consideration to keep in mind.AMD’s changing business model is the second consideration that is often overlooked. AMD essentially has two business segments: the computing and graphics segment and the enterprise, embedded, and semi-custom segment. Up until just three years ago, the former was responsible for the biggest portion of the company’s revenue, while the latter contributed a significantly small portion. However, seeing the declining PC market, the company has greatly shifted its focus towards the semi-custom segment, which has seen promising growth in the gaming industry and is now almost half-and-half with the computing and graphics segment in terms of revenue.Lastly, there are some game-changing technologies that are taking the world by storm and AMD has a product in the pipeline for each one. For instance, ultra-high-definition (UHD) graphic processing has taken center stage now, with the 4K UHD technology now making its way to the mainstream. Seeing this, AMD unveiled its “Polaris GPU” at the Consumer Electronics Show (CES 2016) two weeks ago. The Polaris GPU is a next-generation concoction that supports 4K multimedia technologies and will be big competition for Nvidia and Intel.Also expected to be released later this year is the final installment in the “Fury” lineup of chips, with AMD’s fastest-ever chip coming from its “Radeon” line of business, codenamed “Gemini,” will be a game-changer for the fast-growing industries of virtual reality (VR) and augmented reality (AR). In fact, Facebook’s latest VR headgear, made specifically for immersive gaming, is also expected to run on AMD’s VR chips.Having mentioned these considerations, all of which spell optimism for AMD, I’ll turn towards AMD’s fourth-quarter 2015 earnings results. They might not be very optimistic for Mr. Market, but an investor will likely look past it and see the long-term value in AMD stock.The consensus Street estimate for AMD’s fourth quarter is a loss per share of between $0.12 and $0.13. Looking at the company’s earnings history, I am expecting a miss, albeit a small one.Recall that its graphics segment saw the first-ever sequential revenue increase in two years in the third quarter, so that might surprise us positively. The semi-custom side of its business might also show positive signs of growth from sales in the gaming industry, especially ahead of its continued partnership with Nintendo for its new gaming console. However, this miss will come on the back of slowing PC sales that are, once again, expected to put a dent in AMD’s CPU segment.As for the stock, misses like these are usually followed by a sell-off, which means the stock could head lower than $2.00 on Wednesday. However, short interest in AMD stock, which sits around 20% right now, surged in the last month, so I’m not factoring out the likelihood of a short squeeze that might help balance the decline in the AMD stock price.

The Bottom Line on AMD Stock

Bears may go by the quarter-to-quarter results, but I’m more than optimistic about AMD stock’s long-term prospects, as virtual reality and immersive gaming industries take off. Let’s not forget that the company continues to spend more of its gross profits on research and development than its bigger counterparts, Intel and Nvidia. This bears a positive signal on future innovation at Advanced Micro Devices, Inc.

This Could Be Big for AMD Stock

Before I get down to discussing the earnings forecast, I must mention three important considerations that are substantial to AMD’s business this year.

The semi-conductor industry has seen a massive shift, where two factors alone have defined the success or failure of any company—speed and power—both of which have increased significantly over the years. Stiff competition has driven out many players in the industry that failed to offer competitively high speeds and longer battery lives.

AMD has, however, survived the heavy threats from heavyweights like Intel and Nvidia by staying ahead of the game. The company not only delivered on the two aforementioned factors—speed and power—but it also managed to undercut competition by offering cheaper chips. This ability to survive on razor-thin margins compared to bigger competitors is the first consideration to keep in mind.

AMD’s changing business model is the second consideration that is often overlooked. AMD essentially has two business segments: the computing and graphics segment and the enterprise, embedded, and semi-custom segment. Up until just three years ago, the former was responsible for the biggest portion of the company’s revenue, while the latter contributed a significantly small portion. However, seeing the declining PC market, the company has greatly shifted its focus towards the semi-custom segment, which has seen promising growth in the gaming industry and is now almost half-and-half with the computing and graphics segment in terms of revenue.

Lastly, there are some game-changing technologies that are taking the world by storm and AMD has a product in the pipeline for each one. For instance, ultra-high-definition (UHD) graphic processing has taken center stage now, with the 4K UHD technology now making its way to the mainstream. Seeing this, AMD unveiled its “Polaris GPU” at the Consumer Electronics Show (CES 2016) two weeks ago. The Polaris GPU is a next-generation concoction that supports 4K multimedia technologies and will be big competition for Nvidia and Intel.

Also expected to be released later this year is the final installment in the “Fury” lineup of chips, with AMD’s fastest-ever chip coming from its “Radeon” line of business, codenamed “Gemini,” will be a game-changer for the fast-growing industries of virtual reality (VR) and augmented reality (AR). In fact, Facebook’s latest VR headgear, made specifically for immersive gaming, is also expected to run on AMD’s VR chips.

Having mentioned these considerations, all of which spell optimism for AMD, I’ll turn towards AMD’s fourth-quarter 2015 earnings results. They might not be very optimistic for Mr. Market, but an investor will likely look past it and see the long-term value in AMD stock.

The consensus Street estimate for AMD’s fourth quarter is a loss per share of between $0.12 and $0.13. Looking at the company’s earnings history, I am expecting a miss, albeit a small one.

Recall that its graphics segment saw the first-ever sequential revenue increase in two years in the third quarter, so that might surprise us positively. The semi-custom side of its business might also show positive signs of growth from sales in the gaming industry, especially ahead of its continued partnership with Nintendo for its new gaming console. However, this miss will come on the back of slowing PC sales that are, once again, expected to put a dent in AMD’s CPU segment.

As for the stock, misses like these are usually followed by a sell-off, which means the stock could head lower than $2.00 on Wednesday. However, short interest in AMD stock, which sits around 20% right now, surged in the last month, so I’m not factoring out the likelihood of a short squeeze that might help balance the decline in the AMD stock price.

The Bottom Line on AMD Stock

Bears may go by the quarter-to-quarter results, but I’m more than optimistic about AMD stock’s long-term prospects, as virtual reality and immersive gaming industries take off. Let’s not forget that the company continues to spend more of its gross profits on research and development than its bigger counterparts, Intel and Nvidia. This bears a positive signal on future innovation at Advanced Micro Devices, Inc.

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From: Michael Lombardi, MBASubject: Gold: The Stock Contrarian Investors’ Best Play of the Decade